Daily Form August 6, 2007

Profit Patterns and Risk Management For Active Traders
Trade successfully without having to be right about the underlying market direction
MONDAY AUGUST 6, 2007       07:28 ET

The S&P 500 (^SPC) has now joined the growing number of indices including the Russell 2000 (^RUT) that are now trading below their 200 day EMA. I heard a commentator the other day saying that this is not that unusual and is to be expected. The last part of that remark is not contentious but to highlight the unusually positive conditions that have been seen in the equity markets one has to go back more than a year to July 2006 (in the wake of another period of dislocation in the financial economy) for a previous close below the 200 day EMA.

The Nasdaq 100 (^NDX) remains one of the few indices that still has some distance to go before it test its equivalent level whereas the broader Nasdaq Composite seems destined for a test possibly in today’s trading.

It is looking increasingly likely that a return to the March lows in the neigborhood of 1380 for the S&P 500 is an intermediate term target (i.e. in the next few weeks). If those levels do not hold we could well see a quick visit to 1320 again.

I have featured this chart before but it still shows the severity of the correction that has taken place in the financial sector. This breakdown in the monthly chart of the banking index (BKX) raises the key question of whether, having lost a fundamental cornerstone of the bullish dynamics that have propelled the broad move up since March 2003, we should start seriously factoring in another Fed inspired market rescue package similar to the one that was engineered after the bursting of the last bubble.

The broker/dealer index closed below the 20 month EMA at the end of last week for the first time since the spring of 2003.


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.
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BSC  The Bear Stearns Companies Inc.  

Bear Stearns (BSC) may have let the genie out of the bottle on the opacity of certain credit market derivatives and certainly is getting roughed up with a possibility of a meltdown. Illustrious maverick investor Jim Rogers is recommending a short position in the investment banks and if that turns out to be a good call it is hard to be bullish on the rest of the market.

COF  Capital One Financial Corp.  

In the current environment it is hard to give much credence to long setups and yet shorting in such a volatile environment can also be highly risky so I shall simply reflect on a couple of previous trades that have performed well for us. Capital One Financial (COF) has delivered well after failing to regain ground above the intersection of three moving averages in mid July.

XLY  SPDR Consumer Discretionary Sector  

While most of the realy ugly charts are related to the financial economy the consumer sector is increasingly becoming an attrition frontier. XLY, the exhange traded sector fund for the consumer discretionary stocks, has broken below key support levels and could be headed towards the previous price plateau near $34.

PFG  Principal Financial Group  

Principal Financial Group (PFG), featured in last Monday’s commentary and we can repeat exactly the same comment that steep losses were suffered last week and it is not easily discernible where support might arise.

VSH  Vishay Intertechnology  

Vishay Intertechnology (VSH) was featured here in mid July as a short candidate and the stock has been very rewarding. For longer term position players current levels would be a good exit for half of the position with further erosion to $13 seeming likely for the other half.

BAX  Baxter International Inc.  

Baxter (BAX) faces a formidable hurdle at $56 and any market rally that brings it back close to this level should be seen as a good shorting opportunity.